Estia Health Appeases The Doubters

This story features ESTIA HEALTH LIMITED. For more info SHARE ANALYSIS: EHE

-Underperforming assets acquired
-Earnings contribution in FY16
-UBS favours acquisition strategy
 

By Eva Brocklehurst

Estia Health ((EHE)) continues to consolidate its position in aged care facilities, with four more facilities increasing its total places to 4,127. Brokers welcome the additions but as the financial information on the deal is scant, await further detail before updating forecasts.

Nevertheless, Deutsche Bank notes the acquisitions require only modest increases in staff levels and will be internally funded, thus should prove materially earnings accretive in FY16. Management is targeting 10,000 places by 2020, which implies it will more than double its number over the next few years.

The company has acquired four facilities comprising 469 beds in NSW – Forster, Tuncurry and Taree, and Mount Coolum in Queensland, for a mix of cash and debt. The price was not disclosed but the company said it was consistent with recent acquisitions. The company envisages an opportunity to substantially improve the portfolio performance in NSW, while Mount Coolum is able to utilise management on the Sunshine Coast.

The Mt Coolum facility is one of three owned by CPSM Care and it is unclear to Macquarie just why the company is selling just one of the three to Estia. As all the facilities are currently underperforming and have low levels of profitability they are expected to contribute little to earnings in the next 6-12 months. Macquarie highlights the fact that occupancy and bond improvements in areas outside the major metropolitan regions are often more difficult and take more time. The broker welcomes the addition to the company's bed count as it will increase places by 12.7%. Having added 15.3% since listing, the risk of an earnings miss of prospectus forecasts has diminished.

Morgan Stanley calculate a potential earnings contribution of $6-9m in 2016, noting the facilities being acquired in NSW are currently operating at substantially lower earnings per bed than the Estia average of $24,000 per occupied bed. The underperformance does not surprise the broker as the industry average is just $7,325. Estia has a track recorded of improving returns within the first 6-12 months of operation after acquisition. The acquisition price is estimated at $50-60m and likely to be funded mostly with cash. Without price details Morgan Stanley is making its calculations based on historical evidence. Excluding the acquisitions, the broker forecasts Estia will have a net cash position of $48.5m at end FY15.

On UBS' estimates the acquisitions add 3.5% to FY16 earnings. The broker adjusts for a lower impact of refundable accommodation deposits, which fund future acquisition growth, and calculates an 11% uplift to valuation. The broker favours an accelerated acquisition strategy above all other non-organic growth strategies, given mergers & acquisitions may exhaust the most favourable assets and capture the benefit of FY15-18 structural reforms.

While development opportunities are always available, they tie up capital for three years before return on investment, the broker maintains. UBS assumes no bed growth beyond what the company has announced but reference multiples imply valuation upside from acquisition momentum. UBS notes Estia Health is the second largest listed residential aged care operator in Australia, operating facilities across Victoria, NSW South Australia and Queensland.

On FNArena's database Estia Health has three Buy ratings and one Hold (Macquarie). The consensus target is $6.48, signalling 0.4% upside to the last share price, and compares with $6.18 ahead of the acquisition update. The dividend yield on FY15 forecasts is 2.6% and on FY16 it is 4.5%. Consensus targets range from $5.80 (Macquarie) to $7.95 (UBS).
 

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